Russia row, what are the possible consequences?

The Russian economy is important to the UK, and the EU. But the UK and EU are more important to Russia.

Russia produces 10.98 million barrels of oil a day, against 96 million global output. And it supplies 37.4 per cent of the EU’s gas.

Its GDP in 2016 was $1.9 trillion, against $2.6 trillion for the UK and $17.1 trillion for the EU

As for spending on defense, let this table tell the story:

Expenditure on defense according to the Stockholm International Peace Institute

Spending in $ billion

Percentage of GDP

US

1,686

3.3

China

611

1.9

Russia

69.2

5.3

Saudi Arabia

63.7

10

India

55.9

2.5

France

55.7

2.3

UK

48.3

1.9

Between them, the UK, France, Germany and Italy spend $173 billion on defense.

Reaction

Today’s issue of Le Figaro led with the headline – according to Google translate: “After the suspicious death of another Russian opponent, British police reopen files.” The more sensational of British newspapers seem to be trying to cast France as a second villain in this piece, with the Sun headlining: “France undermines Theresa May by accusing her of punishing Russia too soon and demands more evidence.“ The Times, not in my view the newspaper it used to be, was almost as sensationalist, headlining: “France defies Theresa May over punishment of Russia“ – any opportunity to slag off EU countries seems too good to resist for some publications. Reuters by contrast, headlined: “France says to coordinate response soon with Britain on spy poisoning.” Truth is, the initial reaction from France was along the lines of ‘let’s see the evidence’, this position seems to be changing, with the French foreign minister Jean-Yves Le Drain saying that he had full confidence in the British investigation.

The new German Foreign Minister Heiko Maas said it was "disappointing that Russia so far doesn't appear to be prepared" to help in the investigation and said that Russia should "create transparency.” He added that Germany will consult closely with London "and we can fully and completely understand that Britain had to react to this."

President Trump was slow to react, with some arguing his decision to sack Rex Tillerson was connected to the way his now former Secretary of State condemned Russia. But Mr Trump has since said that based on the evidence, Russia probably did poison Sergei Skripal. Since then, the White House’s Press secretary, Sarah Sanders has issued a statement saying: “The White House stands in solidarity with its closest ally” and “this latest action by Russia fits into a pattern of behaviour in which Russia disregards the international rules-based order, undermines the sovereignty and security of countries worldwide, and attempts to subvert and discredit Western democratic institutions and processes.”

CNN headlined: “Russia is a rogue state. Will Theresa May do what Trump hasn’t?”

Evidence

For the time being I am going on the belief that British Intelligence knows what it is doing and is sure of its facts. Obviously, it has got things wrong before, and if it has got this one wrong, then that would be humiliating. But I think you have to assume that an organisation run by men and women with IQs off the charts would only suggest Russia was behind the incident if it was sure of its facts.

UK’s options

The UK’s options are limited, but some can have an effect. Expelling diplomats seems to me to be gesture politics. Launching a cyberattack on Russia would be highly dangerous, removing Russia Today’s license, would seem to me to be self-defeating, considering how tiny Russia Today’s audience is, and how Russia may respond by removing UK broadcaster’s licenses in Russia.

Freezing Russian assets, on the other hand, would hurt, especially considering how so many of Mr Putin’s friends use London as a second home.

The UK could of course pull out of the of the World Cup, meaning the tournament will lose a potential quarter finalist, err, not sure many people other than the English would cry over that one.

Wider initiative

But if the EU, or at least major EU powers such as France and Germany and then the US too, took action against Russia, that would hurt.

Ever since the arrest of Mikhail Khodorkovsky, former richest man in Russia and political rival to Mr Putin, in 2003, the Russian President has showed himself to have no interest in either democracy or the rule of law when it clashes with his own interests.

Sanctions

Sanctions against Russia have been in place since 2004 but have had little effect. That is largely because the sanctions were so limited. The EU seems to want to punish Russia in as trivial a way as possible.

Banning the import of Russian oil and gas would hurt the EU, but it would hurt Russia even more.

If England pulled out of the World Cup, so what. In any case if it did that, under FIFA rules, it would be banned from the following tournament in 2022. But if Germany, France, and Spain pulled out of the World Cup too, that would be a blow to Russia, and may, as a side benefit, see the end of FIFA, an organisation that is rotten to the core.

Russia retaliations

One victim in all of this could be BP, in 2015, 22 per cent of its profits came from Russia.

But I have a bigger concern. Russia is clearly becoming more aggressive and assertive and makes mild threats about nuclear weapons if anyone objects.

The international community cannot sit back and let Russia run rough shod over the rule of international law, paying no regard to human rights.

But if the end result is military conflict, that will be catastrophic too.

The markets, by the way are far too sanguine about this one.

And one more comment – this incident illustrates why we need a united world as much as possible, the current trend towards nationalism and greater emphasis on nationhood and not on international collaboration is very dangerous.

PS, I do, by the way, partly blame the West’s lack of support during the Russian crisis of 1998 for Russia’s belligerence today.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

Please remember

This website can help you make informed investment decisions, not give personalised advice. If in doubt, please seek independent financial advice. Past performance is not an indicator of future performance and since investments can fluctuate in value, you may get back less than you pay in. Tax allowances and the benefits of tax-efficient accounts could change in the future.